Seems like a win-win: homeowners, unable to make their loan payments, short sell their homes to investors who, in turn, rent the properties back to them so they don’t have to move.

Kids get to stay in the same schools, sellers don’t have to find a rental, the new rent payments are usually lower than existing mortgage payments they couldn’t afford… sounds like a good idea, right?

Problem is, in most cases, it’s illegal.

There’ve been numerous short-sale scams over the years and banks who choose to cooperate in a short sale want to make sure they’re not party to any dubious behavior.

At the heart of the issue are investors who’ve purchased short sales, then immediately flipped them for a profit. In fact, until just recently, Realtors, due to insurance regulations, weren’t allowed to represent investors in short-sale purchases.

If an investor can buy a short sale, flip it and profit from it, then the bank short-sold the property too low. Since banks lose money on short sales, they want assurances that their losses won’t line investor’s pockets at the bank’s expense. If anyone benefits from a short sale, it should be another homeowner, not an investor.

Lenders also don’t want previous owners benefitting in any way. Banks figure that if they’re taking it in the chops for the seller’s inability to make loan payments they actually promised they’d pay by signing a promissory note, then a seller shouldn’t benefit in any way other than getting out from under the debt.

Therefore, the banks insist that the seller cannot stay in the property under any circumstance. After all, if they can remain for a substantially lower monthly financial output, then that’s a benefit, right?

For this reason, buyers and sellers involved in short sales must sign an Arms Length Affidavit. It typically includes the following dialogue:

“There is no agreement, whether oral, written, or implied, between the seller and the Buyer and/or their respective agents that would allow the seller to remain in the property as tenant or to regain ownership of the property at any time after the consummation of this sale transaction.”

No signature, no sale.

What are the ramifications for violating the affidavit? Potential legal action. And, in our opinion, short sales have enough troubles of their own without the possibility of future litigation.

Our recommendation? Sell and move. Don’t swap one set of troubles for another.

Carl Medford is a licensed Realtor with Prudential California Realty in Castro Valley and a licensed general contractor. This article is sponsored by the Central County Marketing Association at www.ccmgtoday.com